Making and accepting payments, as well as making deposits to your nonprofit’s bank account, are part of the volunteer treasurer’s cash handling duties. In addition to these tasks, you will also want to periodically review all of the transactions that have been made to your nonprofit’s bank accounts. The process of reviewing these transactions, and making certain that your nonprofit’s record matches that of the bank, is known as bank reconciliation.

Why is Bank Reconciliation Important – Isn’t the Bank Always Right?

Some individuals or small business owners simply allow their monthly checking and other statements from the bank to remain unopened. They do this because they assume that since most banks use automated software to track changes to their accounts, the bank must be correct.

Bank Errors Still Occur

While computers and other technology do help to prevent accounting errors made by the bank, they can still sometimes happen. For this reason, everyone should reconcile their bank statement when they receive it each month. However, this isn’t the primary reason why a nonprofit or other organisation should do a bank rec on a regular basis.

Reconciliation is an Accounting Best Practice

The most important reason why you should reconcile your NFP’s monthly banking statements is because it is part of your fiduciary and oversight duty. You need to ensure that the amounts that you report in your books for cash and other accounts are consistent with that recorded by the bank. As some payments and deposits that you have made may not have been processed by your bank at the time the statement was printed, these transactions will need to be reconciled so that you can see if the bank’s record is consistent with your books.

Doing bank reconciliations are an accounting best practice, so even though this is a time-consuming process, it is a very necessary one.

The Process of Bank Reconciliation Makes it Easier to Spot Theft and Misappropriation

Reconciling your General Ledger’s Cash account with the bank statement provides an additional layer of security and can help you spot any irregular transactions that might tip you off to the potential that misappropriation of funds and internal theft have occurred.

Key Steps to Correct Bank Reconciliation

Reconciling the bank statement is a tedious task as most NFPs have numerous transactions throughout the month. There are several stages in the bank reconciliation process, and each step must be completed correctly for the cash account to be adjusted. While the process of reconciling the bank statement can be quite lengthy, the basic steps are fairly straightforward.

Step One: Adjust the Bank Statement Balance to Reflect Outstanding Transactions

By the time that you get your bank statement, there are transactions that are already on your books that haven’t cleared the bank. You will want to adjust the bank statement balance first in these circumstances.

To do this, review the transactions in your cash account and on the bank statement. “Check off” the transactions that appear in both places. You will then need to make a few additions and subtractions to the bank statement to reflect those transactions that you have recorded on the books.

Add any deposits that are on your books, but that are not yet on the statement to your bank balance. Deduct outstanding cheques that are on your books but not on your bank statement. You will then need to add, or deduct any bank errors that are found. This will give you the bank statements corrected balance.

Step Two: Adjust the Balance of the Cash Account to Reflect Outstanding Transactions from the Bank

Sometimes, there will be transactions that are recorded on the bank statement that are not on your books, and you will need to adjust the balance of your cash account to reflect these transactions.

Since you have already “checked off” the transactions that match both the cash account and the bank statement, and adjusted the bank statement, you will now need to adjust your cash account for those items that the bank has processed but not recorded on the cash account.

Subtract your bank’s service charges and any cheques that were returned for insufficient charges, as well as the related NSF fees. Also deduct the printing and shipping charges for new cheques if applicable. Next, add any interest that was earned and reported on the bank statement. Finally, you will need to add or deduct any errors in your cash account that are found. This will give you your cash account’s corrected balance.

Step Three: Compare Balances

You will now want to compare balances between the corrected bank statement and your corrected cash account. The two amounts should be identical. If they aren’t, you have made an error somewhere and you will need to go back through the process of reconciling the bank statement and cash account until the two balances match. Most errors are simple mathematical or data entry errors, or including an amount that was previously recorded either in the cash account or bank statement.

Step Four: Making the Journal Entries

Finally, journal entries should be made to account for the additions and subtractions to the cash account. If you’ve increased the cash account, you will generally need to make a journal entry to debit cash, and another account in your general ledger accounts will then need to be credited to reflect this. If you’ve decreased the cash account, cash is credited and another general ledger account will be debited.

Save Time with Admin Bandit Software!

While bank reconciliation can take quite a while, especially if you are still creating your own spreadsheets and doing manual data entry, there are software programs that can reduce the time and hassle that it takes to reconcile your nonprofit’s bank statement to the general ledger cash account. Get in touch today to find out how Admin Bandit’s software for volunteer treasurers can reduce your stress level and free up your time for more important tasks!